The great sin of cotton subsidies

It is grand time the US started practicing what it preaches by addressing the very agricultural subsidies that are responsible for keeping a multitude of Third world farmers locked in a state of abject poverty

By Joseph Stiglitz

The US likes to think that if poor countries simply open up their markets, greater prosperity will follow. Unfortunately, where agriculture is concerned, this is mere rhetoric. The US pays only lip service to free market principles, favoring Washington lobbyists and campaign contributors who demand just the opposite. Indeed, it is the US' own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth.

Subsidies hurt developing country farmers because they lead to higher output -- and lower global prices. The Bush administration, supposedly committed to free markets around the world, has actually almost doubled the level of agricultural subsidies in the US.

Cotton illustrates the problem. Without subsidies, it would not pay for the US to produce much cotton; with them, the US is the world's largest cotton exporter. Some 25,000 rich US cotton farmers divide US$3 billion to US$4 billion in subsidies among themselves -- with most of the money going to a small fraction of the recipients.

Seldom have so few done so much damage to so many. That damage is all the greater when we consider how the US' trade subsidies contributed to the demise of the Doha Round.

Rather than offering to do away with its cotton subsidies, the US offered to open up its markets to cotton imports -- an essentially meaningless public-relations move that quickly backfired. Owing to its huge subsidies, the US exports cotton, and it would import little even if formal barriers were removed.

Thus, recent trade negotiations have a surreal air about them, because, whatever their outcome, ultimately cotton subsidies will have to go.

Brazil, frustrated with the US' intransigence, brought a case against US cotton subsidies before the WTO, which ruled as almost any economist would: the subsidies distort world trade and are therefore prohibited.

Faced with the WTO order, the US will try to comply with the letter of the law and avoid its spirit, making changes in the subsidy program to ensure "technical" compliance. But these attempts will almost surely fail; in the end -- though it may take years -- cotton subsidies will be eliminated.

Of course, the EU's subsidies are far larger, but, in contrast to the US, Europe has made some effort to reduce them, especially export subsidies. While export subsidies appear more obviously "trade distorting," the US' cotton and other subsidies are in fact almost as bad. When subsidies lead to increased production with little increase in consumption, as is typical with agricultural commodities, higher output translates directly into higher exports, which translate directly into lower prices for producers, lower incomes for farmers, and more poverty in the Third World, including millions of cotton farmers eking out subsistence incomes in semi-arid conditions.

The US and other advanced countries are the real losers from the demise of the Doha Round. Had the Bush administration fulfilled its commitments, US taxpayers would have benefited from the elimination of huge agricultural subsidies -- a real boon in this era of yawning budget deficits. Americans would have been better off as consumers, too, with increased access to a variety of low-cost goods from poor countries.